When people don’t have a sound strategy for retirement investing, they’re more likely to make investment decisions based on emotions, simplistic media reports and misguided advice from friends. While emotions and intuition are powerful in the right context, they often lead to poor decisions when it comes to retirement investing.
For example, some people have strong negative associations with debt, especially if they’ve encountered problems with debt or seen parents struggle with debt. As a result, they may insist on paying off any outstanding loans and mortgages in retirement, even when that’s not the best strategy. Depending on the situation, paying off these debts may be a mistake that limits your options.
People also tend to make poor investment decisions when it concerns their family and children. Many parents feel they should liquidate investments because they love their children and want to pay for them to attend the best college possible, regardless of its impact on their retirement planning.
When it comes to retirement investing, you can’t expect quality results from a quick-fix approach. It’s an ongoing process, and getting unbiased, professional advice is important in avoiding emotional decisions and achieving your financial goals.
Here are seven tips for successful retirement investing:
1) Assess your cash flow at least once a month: Everyone says they keep tabs on their monthly expenses, but if you dig a little deeper, relatively few actually understand where their money is going. That uncertainty leads to unnecessary anxiety and stress.
Action Step: Set aside time to track your cash flow (income and expenses) so that you know how much of your money is going to expenses and how much is going toward improving your net worth.
2) Track your net worth — and where it’s invested: When people calculate their net worth, they’re often surprised to find it’s much higher or lower than they expected. But it’s also important to know where that net worth resides. A retirement plan is an investment, as are insurance policies with cash value. If you have a second house you use as a personal asset, you may think of it as an investment, but it’s probably more of an expense.
Action Step: Create a personal balance sheet that tracks the amount and nature of your net worth.
3) Avoid paying interest on debts that do not have an associated investment return: Credit cards, personal loans and car loans are examples of debts that don’t produce an investment return.
Action Step: Spend time with your lender to make sure you understand the interest, and look at refinancing options.
4) Make sure your overall investment allocation is balanced and aligned with your risk level: Many people don’t realize that they are not properly allocated. Before you move funds, obtain a second and third opinion.
Action Step: Request a portfolio evaluation from a qualified professional.
5) Use properly diversified investments to spread investment risk: Many people know that it’s important to diversify investments, but don’t realize that owning a variety of mutual funds is no guarantee of a diversified portfolio. They don’t take the time to evaluate all of the investments that make up each mutual fund.
For example, if you owned 10 different mutual funds, and each of these funds includes 2 percent of Apple stock, your overall portfolio would have a much larger position with Apple than you might think. If an individual investment is overrepresented and the company runs into problems, it could have a much greater impact on their portfolio than anticipated.
Action Step: Obtain an overlap report between mutual funds to look inside all of the funds and overlap for particular securities.
6) Take time to become an informed retirement investor: There’s no need to try to become your own financial expert, but there’s a real advantage to arming yourself with basic knowledge about retirement planning. As an informed buyer, you’ll be better prepared to choose financial advisors and communicate your preferences and goals to them.
Action Step: Begin to familiarize yourself with the easy-to-use financial tools and informational guides offered on our resources page.
7) Assemble a team of professionals to help you with financial matters: Some people have a bad experience due to poor financial advice and fall into the trap of trying to be a “do-it-yourself” investor. This often increases the risk of mistakes that jeopardize their retirement. Instead, focus on getting the right success team working for you — a personal advisory board that’s prepared to guide you to retirement and beyond.
Action Step: Start speaking with qualified financial professionals, taking advantage of initial free advice and opinions.
While it’s never too early or too late to start planning for retirement, in general, the sooner you start, the better the outcome. Applying these seven strategies and taking the initial action steps is a great way to avoid poor investment decisions based on emotions and truly take charge of your financial future.
Worried about outliving your money? Request a free, 30-minute consultation with Richard Brothers and start planning for retirement.
